The Inflation Catch-Up Game
As price increases accelerate, policymakers at leading central banks are slowly starting to move away from the narrative of “transitory” inflation that has already cost them the policy initiative. But the needed pivot is far from complete and not nearly quick enough, particularly at the US Federal Reserve.
CAMBRIDGE – Inflation is now on the front page of newspapers around the world, and for good reason. Prices of more and more goods and services are increasing in a manner not seen for decades. This inflationary spike, accompanied by actual and feared supply shortages, is fueling both consumer and producer anxiety. By also threatening to worsen inequality and derail a much-needed sustained and inclusive economic recovery from the COVID-19 pandemic, it is also becoming a hot political issue.
For their part, policymakers at central banks in the United Kingdom and the United States have started to move away from the narrative of “transitory” inflation. (The cognitive transition at the European Central Bank is less pronounced, which makes sense, given that the inflation dynamics there are less pronounced.) But the pivot is far from complete and not nearly quick enough, particularly at the US Federal Reserve, the world’s most powerful and systemically important monetary institution. Delays in Congress approving measures to increase productivity and enhance labor-force participation are not helping, either.
The reasons for the rise in inflation are well known. Buoyant demand is encountering inadequate supply – a result of disrupted transportation and supply chains, labor shortages, and an energy squeeze.